NPS returns: Choosing a pension fund for retirement? Why subscribers should look beyond one-year performance

Choosing a National Pension System (NPS) pension fund based on its latest returns could be misleading. A scheme that delivers strong returns over one year may not necessarily outperform its benchmark over longer periods or protect investors adequately when markets decline.

For subscribers investing towards retirement over 15-20 years, consistency across market cycles is important. Investors need to examine not just how much a pension fund has earned but also how frequently it has beaten its benchmark, how it has performed during market rallies and whether it has limited losses during downturns.

A November 2026 analysis by M. Pattabiraman, founder of personal finance platform Freefincal, highlights three measures that investors can use to evaluate NPS schemes. These are rolling-return outperformance consistency, upside performance consistency and downside performance consistency.

These measures provide a broader understanding of a pension fund's historical performance than a comparison based solely on trailing returns.

Trailing returns show how much a scheme has earned between two specific dates. However, they represent only one starting point and one ending point, making them insufficient to establish whether a fund has performed consistently.

Rolling returns address this limitation by calculating returns across multiple overlapping investment periods.

For instance, instead of examining only the five-year return ending on a particular date, investors can look at all available five-year investment periods within the historical data.

The objective is to determine how frequently a pension fund has beaten its benchmark across these periods.

Pattabiraman explains that if 876 comparable fund and benchmark returns are examined and the scheme outperforms the benchmark in 675 instances, its rolling-return outperformance consistency would be approximately 77%.

A higher percentage indicates that the scheme has beaten its benchmark more frequently. Investors should examine this measure across three-year and five-year periods to understand longer-term performance consistency.

Outperforming a benchmark during a market rally and limiting losses during a correction are two different aspects of fund performance. Investors should examine both before selecting an NPS pension fund.

Upside performance consistency measures how frequently a scheme beats its benchmark when the benchmark delivers positive returns.

For instance, a score of 70% means the scheme has outperformed its benchmark in seven out of every 10 periods when the benchmark was rising. This indicates how consistently the scheme has participated in market gains.

Downside performance consistency, meanwhile, measures how frequently a scheme beats its benchmark when the benchmark declines.

A score of 60% means the scheme has outperformed its benchmark in six out of every 10 periods when the benchmark was falling.

A higher downside consistency score indicates better relative performance during declining markets. However, it does not necessarily mean the scheme delivered positive returns or avoided losses.

For investors approaching retirement, downside performance deserves particular attention because substantial portfolio losses can be difficult to recover from when withdrawals are approaching.

Investors should also compare a pension fund's returns with the volatility it has experienced to generate those returns.

One way to do this is by examining excess returns and excess risk against the scheme's benchmark.

A positive excess return means the scheme has delivered higher returns than its benchmark. Negative excess risk indicates that the scheme has experienced lower volatility than the benchmark.

Pattabiraman illustrates this using ICICI Prudential Pension Fund Scheme E under Tier I. The example records a one-year return of 35.089% for the scheme against 22.704% for its benchmark, translating into excess returns of 12.385 percentage points.

Its standard deviation, a measure of volatility, was 3.592%, compared with 3.732% for the benchmark. This meant the scheme's volatility was 0.140 percentage points lower.

However, Pattabiraman clarifies that these figures are illustrative and do not represent current performance data.

The broader takeaway is that investors should not assess a scheme solely on the returns it has generated. They should also examine whether those returns came with higher or lower volatility than the benchmark.

Investors should compare schemes within their respective asset categories rather than rank all NPS pension funds together. Equity, government securities, corporate bonds and gilt schemes have different investment mandates and risk profiles.

The benchmarks also vary across categories.

Pattabiraman cautions that the benchmarks used for non-equity schemes are notional and may not adequately represent their respective asset classes. Investors should exercise discretion when interpreting these comparisons.

For shortlisting, investors can begin by examining three-year and five-year rolling-return outperformance consistency. A threshold of 60-70% can serve as an initial screening measure, followed by an examination of upside and downside performance.

However, applying excessively restrictive filters could eliminate schemes worth considering. Pattabiraman suggests retaining around five to six schemes for further evaluation rather than attempting to identify a single winner based on historical returns.

Ultimately, historical outperformance cannot guarantee future returns. NPS subscribers should also consider their retirement horizon, asset allocation, risk appetite and proximity to retirement before selecting a pension fund manager.

A scheme that has performed well historically may not necessarily remain among the best performers in the future. For retirement investors, consistency, risk management and suitability to their investment horizon matter more than simply chasing the highest recent return.

Kirti jha

Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.

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